KBC Posts Loss on Pending Divestments as Interest Margin Shrinks

Aug. 7 (Bloomberg) -- KBC Groep NV, the Belgian bank and
insurer working to repay 6.5 billion euros ($8.05 billion) of
state aid, posted an unexpected loss after writing down the
value of its remaining businesses to be sold.

The second-quarter net loss of 539 million euros included a
1.2 billion-euro reduction in the carrying value of Nova
Ljubljanska Banka d.d., ZAO Absolut Bank, KBC Bank Deutschland
AG and Antwerp Diamond Bank NV, the Brussels-based company said
today in a statement. Underlying profit fell 30 percent to 372
million euros in the quarter as net interest income shrank 17
percent. Analysts projected 357.3 million euros, according to
the average of 10 estimates compiled by Bloomberg.

“These decisions have further reduced the volatility of
our profit and hence the risk profile of our company,” Chief
Executive Officer Johan Thijs said in the statement. “Net
interest income contracted somewhat primarily on account of
lower reinvestment yields and higher senior debt costs.”

While the loss reduced KBC’s core tier 1 ratio including
the effect of a pending merger in Poland to 13.4 percent from
13.6 percent at the end of March, the bank and insurer forecast
it will have a common equity ratio of 9.5 percent under Basel
III capital rules by the end of next year after repaying 4.17
billion euros of state aid plus penalties. That would still
leave 2.33 billion euros of Flemish aid outstanding, which needs
to be reimbursed at a 50 percent penalty.

Lower Yields

“The message on capital looks strong with fully loaded
ambition of 9.5 percent end 2013,” Albert Ploegh, an analyst at
ING Groep NV in Amsterdam, wrote in an investor note. “The
slight miss on revenues was made good by a low level of loan
impairments.”

KBC fell as much as 3.7 percent on Euronext Brussels and
traded 22 cents lower at 17.90 euros by 9:07 a.m. local time.
The shares have gained 84 percent since the start of the year,
the best performance in the 60-company Bloomberg EMEA Banks
Index in that period.

Net interest income, KBC’s biggest source of revenue, fell
to 1.15 billion euros on an underlying basis from 1.39 billion
euros in the same period a year earlier. Adjusting for
divestments, the drop was 10 percent as the difference between
what the bank pays for funds and what it charges for loans
narrowed 11 basis points from the preceding quarter to 1.82
percent, the lowest margin in two years.

KBC accepted lower yields after reducing its investments in
higher-yielding bonds in southern Europe, cutting its holdings
of Spanish sovereign bonds to 341 million euros and of Italian
debt to 1.36 billion euros, and keeping more cash in deposits at
the European Central Bank.

Loan Losses

Its funding costs also rose after KBC Bank raised 2.25
billion euros in March selling two-year senior unsecured debt at
a margin of 255 basis points above the benchmark swap rate and
five-year debt at a spread of 285 basis points.

The bank set aside 198 million euros to cover loan losses
in the quarter, a decrease from 261 million euros in the
preceding three-month period. Loan provisions covered 62 percent
of non-performing loans at the end of June, down from 63 percent
at the end of March and 66 percent at the end of last year.

Provisions in Ireland, where KBC gave its local banking
unit an additional 50 million euros of capital to keep the tier
1 ratio at more than 11 percent, dropped to 136 million euros
from 195 million euros in the first quarter. KBC maintained a
forecast for Irish loan losses of 500 million euros to 600
million euros this year.